Which is a better investment: Real Estate vs. Stocks

What is a better investment, buying real estate or investing in stocks?  

I grew up in a family and culture where getting a house is the best thing you can do for yourself. I used to think that to until recently. I decided to crunch the numbers on this and share with you what I learned. I live in NY so I will be using NY real estate numbers. I used calculators from mortgagecalculator.org and bankrate.com (which I think are the best ones out there).  Lets start with the house.

House – $500,000

20% Down payment: 100,000

Interest rate:  4.25% (25 yr loan)

Loan: $400,000

Monthly Payment: $2,687.79

Total Interest Paid: $250,085.72

Total Tax Paid: $156,250.00 (1.25%)

Total cost after 25 yrs of owning a house: $806,335 + $100,000 (down payment) = $906,335

Remember this is just straight cost of the house with no maintenance, repairs, etc. Now you fully own your house and it just kept up with inflation or maybe not. You have to ask yourself house worth $906k after all of this time? Depends on the housing market at that time. Now lets take a look at putting your money in the S&P 500 index fund. I will be using the same numbers.

Vanguard S&P 500 index fund – $100,000

Compound interest rate: 11% (since 1976 this is what the fund has returned, on vanguard.com)

Total Expense ratio: .05% (very very low cost and low turnover)

Total fund value after 25 yrs: $1,342,666 

Now lets say that you start with $100,000 and put in only $600 a month. If you think 11% is too high I have showed you other %’s as well.

At 11%: you will have: $2,272,937

At 10%: you will have: $1,862,379

At 9%: you will have: $1,527,040

At 8%: you will have: $1,253,319

At 7%: you will have: $1,030,013

At 6%: you will have: $847,913

At 5%: you will have: $699,452.

This is how much cash you will have that is liquid at your disposal. There is a big difference here of about 400k and that is just stopping at 25 yrs. If you let your investment grow and live after 25 yrs without putting a dime into it it will skyrocket.  If you left it in for just another 5 years your total in the index fund will be $2,255,139. I highly doubt the house will be worth that much. That said, I do think buying a house at the right price is great since its yours forever and you can leverage it as well for a loan, etc. But as an investment it does not compare to the value of stocks at all. If you want to invest in real estate without being a landlord because you think its better than stocks you can just invest in a REIT index fund. Remember, all these numbers are just math not an opinion! 

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Manpreet Jassal

@mjassal

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My financial cents

Stock market is hitting new highs and I hope you are making money. Here is what you need to do according to me based on all the books and videos on finance I have seen. Tons of research as well on asset allocation.

  • Only buy index funds!  (even in your 401k, only have these funds)
  • If you need an advisor, please get a FEE ONLY advisor
  • If you can, definitely invest in a Roth IRA and max it out every year.
  • Do not get any annuities or permanent life insurance products (scam)

I have a 4 fund portfolio which i think works for 98% of average investors:

  1. VG total stock market index fund
  2. VG total international stock index fund
  3. VG total bond market index fund
  4. REIT index fund

You decide your own asset allocation.

The whole strategy here is long term .  In 20-25 years this is going to be any actively managed funds and save you A LOT on fees.

Enjoy.

@mjassal (please free to ask me any question at all)